Th3.1: Reasons for Demergers

Question 1

What are four reasons for demergers?

Answer 1

lack of synergies
value of the company/share price
focussed companies
competition authorities

Question 2

Synergies

Answer 2

this is when the different parts of the company have no real impact on each other and fail to make each other more efficient

Question 3

What does a lack of synergy mean?

Answer 3

managers are splitting their time between areas which are so different it could lead to diseconomies of scale - firms may split in order to avoid these

Question 4

Value of the company/share price

Answer 4

some companies demerge because the value of the separate parts of the company is worth more than the company combined

Question 5

Value of the company.share price: Why is this?

Answer 5

because some parts of the business are operating well and have potential to grow but the overall value is brought down because of the lack of success or lack of potential for growth of other parts of the business

Question 6

What do financial markets talk about involving value of the company/share price?

Answer 6

‘creating value’ by splitting up companies like this

Question 7

Focussed companies

Answer 7

some people believe if the company and the management are more focussed on individual markets they become more efficient and successful, and make higher profits

Question 8

Focussed companies: Management have limited…

Answer 8

time and skills and are then unable to spend the required time to make all areas of a huge diverse business successful

Question 9

Focussed companies: By focusing on one area. managers can improve…

Answer 9

their skills and knowledge and become more successful

Question 10

Competition authorities

Answer 10

may also want to avoid attention from competition authorities